What if your logistics is already the best? (Part III)

How might rising fuel and energy costs
impact your supply chain? 

We live in turbulent times. Exactly how turbulent we will only be able to judge with hindsight.  The internet is changing everything more rapidly than anyone can keep up with.  

Climate change is boiling us slowly, like the proverbial frog in the pan on the stove who doesn't realise he needs to jump out until it is too late and he is half cooked.

We have also forgotten about the resource shortages that put a lid on the economy just before the GFC in 2008.  Remember when crude oil peaked at over $140 per barrel and the fuel price reached $1.80 per litre?  Well that may look cheap a few years from now if the CSIRO's dire prediction of $8.00 per litre by 2018 comes true, (page 10). The impact of this will flow throughout the global economy.  Jeff Rubin wrote about this in his book "Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization".  Jeff Rubin also speaks about it on YouTube for the non-readers.

"How might $8.00 per litre fuel impact your supply chain?"

The set of changes that are inevitably going to be forced upon us by the climate change and the associated mitigation strategies such as carbon taxes, energy efficiency, alternative fuels and energy sources are collected under the banner of Green Supply Chain (see the white papers section of our website).

There are things you can and should be doing now to get your organisation into a low carbon mindset so that you will be prepared better than most as the heat literally gets turned up on your supply chain.  My thesis is that the impact of this will force you to innovate and consider strategies that you might currently reject.  

Taking a further 25% out of the costs of a currently maxed-out efficient supply chain by collaborating with your competitors may well be a business saving strategy. You and your logistics sharing partners maintain your supplier of choice status; whilst others are driving around half empty trucks paying $8.00 per litre for diesel.

I will be speaking on the subject of Green Supply Chain at the upcoming Smart Conference in June this year.



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What if your logistics is already the best? (Part II)

Is collaborative logistics the future?

Yesterday I suggested that you should collaborate* with your competitors to reduce your logistics costs.  If you actually did this what might it look like and where could you take it?

Well it might look like BevChain. Which is a joint venture between Lion Nathan and Linfox.  This is a live example right now of what I am talking about at least in basic principle.  It obviously helps if you start off with a giant like Lion Nathan to kick things along.  

I think the joint venture is the key.  It is not just a venture by Linfox and Lion Nathan is not trying to be a 3PL.  The two together provides the critical volume required to get economies of scale and essential infrastructure and process development that can be sold to other industry players.  I see no reason why the joint venture idea could not be extended to multiple industry suppliers who provide the logistics volume to make a viable business and who also have a stake in the new company and share in the savings.  Indeed the whole thing could be run almost like a co-op to reduce costs to all concerned whilst still providing a return to the 3PL partner.

If you apply some Vested Outsourcing concepts you will ensure that the costs keep going down over time whilst also enhancing the profits for the 3PL partner.  Once you have the basics running well then why not go further up and down the supply chain?  The new industry based logistics company could aggregate demand for common supplies, raw materials or even  stock and buy on behalf of the group.  This would allow them to negotiate better volume discounts and also manage inventory jointly to eliminate multiple safety stocks.  

Managing the total freight task goes without saying, but why not develop a shared services online direct to customer distribution model?  This could be presented to the customer as a category killer single distributor or individually branded mini-sites, but offer to consolidate freight as an incentive to buy across multiple brands.

Of course such a strategy endangers the currently entrenched distributors, and depending on the relative market power differential between maker and distributor, this may or may not be a good strategy.  Generally the theme of the internet age is that the middle man is being squeezed as the makers of products seek direct relationships with their customers.  If the only value you add is a cheap price, someone will eventually find a way to do it cheaper than you.

This idea was developed by DHL with their Pharmacy Supply Model in 2006.  For a while they turned their pharmaceutical pre-wholesale 3PL business into a wholesale distributor and challenged the big three pharmaceutical wholesalers (Sigma, Symbion, API).  The alliance that made it possible with Alphapharm eventually failed and the business could not fulfill its promise, but it was a very innovative idea at the time.

I worked on the DHL Pharmacy Supply project for my first consulting job with Logistics Bureau and it was an extraordinary experience to help develop such a a ground breaking new logistics service.

If the manufacturers and product originators can't or won't develop such a service it leaves the door open for the wholesalers to do essentially the same thing further up the supply chain - if the circumstances are right.  The retail pharmacy supply industry certainly has the right set of conditions for this to occur.  Three wholesalers serving the same market in a highly competitive and increasingly commoditised environment plus a number of smaller distribution operations fragmenting the supply chain.

These are I think the prime conditions to make such a solution possible:

1. A few major players who can reach agreement for a joint venture to pool their logistics operations
2. High competiton with price sensitivity
3. Opportunity to grow by securing some of the remaining logistics and thus make some profit from logistics services that would not otherwise be available to them.

Like all good consultants I have come up with a name for this idea.  I call it the Integrated Collaborative Logistics Service or ICLS for short.  In part III I will discuss some other reasons why I expect to see more of this type of collaborative logistics in future.


* Just in case it is not obvious, the sort of collaboration I am talking about is not anti-competitive or price fixing in anyway. The formation of a joint venture aimed at achieving a low price logistics service does not limit what any of the joint venture partners do with their cost savings.  They can hold on to them to invest in innovative and more profitable business ideas or continue the price war and be back where they started.  I am simply pointing out the next logical step in logistics evolution when a certain set of conditions exist.

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What if your logistics is already the best? (Part I)

Is this the end of logistics as we know it?

Let's say you have done just about everything you can to optimise your logistics processes.  Let's just imagine that you have the best forecasting and inventory management process.  You have the latest warehouse systems and materials handling technology.  You have the best value freight deals and the most efficiently routed transport fleet.  You are now toiling away at the last 1 or 2% of productivity and efficiency gains available to you.  What now?  Sit back and relax because you are now done?

Now lets add in the fact that you have done all this just to stay in business.  You have several major competitors who have done the same things that you have.  You and your competitors have had to do this because you are in a business that used to be nicely profitable but is now a commodity where the cheapest price wins.  The sliced bread market would be an example of this.

At the macro level logistics is just maths and the maths work the same for everybody.  So all else being equal, at some point your logistics simply cease to be a competitive advantage.  If your products are also a commodity then no doubt you have competed in a race to the bottom based on price.  Your razor thin margins mean that your business may well be an unpleasant place to work because cost control is a primary focus.  A serious dose of innovation is required.

What do you do?  Is there even an answer to this question?  Is this the end point of logistics?  How many industries and organisations are already at this point?  Where else can logistics go?
Does anyone care about who delivers your product?  If your logistics has become a commodity and is largely invisible as long as it fulfills the promise, then does it matter who does it?

If logistics is just maths, and the maths works the same for everyone, then why not make it work for everyone?  Once it has reached this point, there is only one place for logistics to go next and that is to embrace collaboration to its fullest extent.  This means collaborating with competitors - no I don't mean price fixing, I mean take advantage of the maths and get your cost reductions from consolidating logistics operations with competitors in industries that serve the same markets.

Each of the retail outlets you supply probably also get a delivery from your competitor or your competitor delivers to a competing outlet nearby.  This is currently done by two vehicles with two drives travelling similar routes.  How is this not a waste?  You each have a warehouse and storespeople and associated infrastructure and administration.  Your individual volume may not justify investment in the most efficient technology but the combined volume would make such an investment worthwhile and reduce the overall costs further.

This is how third party logistics works and how they make their money.  They share infrastructure across multiple clients and charge what the market will bear. This is about the same or a bit more than what it would cost you to do it yourself if you did it well, which you didn't or you wouldn't have outsourced it.

Does this sound crazy?  If so good!  This is just Part I.  I will explore some possible business models for this really not so crazy idea in Part II.

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January 2013 Heatwave wakes us up to the impact of Climate Change

The current record breaking heatwave sweeping across Australia driven by a stalled wet season is another symptom of Global Climate Change.  It really makes those old articles denying climate change and predicting catastrophe from the carbon tax look completely out of touch with reality.  This particular piece of Ostrich like thinking from Viscount Monckton from early 2011, now looks particularly silly given our record heatwave in January 2013.  

Green Supply Chain - what you need to know and what you should be doing

The climate change debate has been raging for some years now.  Some people think the climate is warming, some think it is not.  Some think it is warming but there is nothing we can or should do about it, but the majority view is that climate change is our responsibility and we can and must do something. 

Well now, it doesn’t really matter what you think, because the tide of public opinion, government action, energy investment and technology development, is now on an irrevocable path towards       a low carbon economy.

The three major drivers towards a low carbon economy  (apart from the science) are: